Megaport Limited: 6x LTV to CAC shows growth investment creates value

About the author:

Author name:

By Nick Harris

Job title:

Senior Analyst

Date posted:

11 August 2022, 7:00 AM

Sectors Covered:

Telecommunications, Technology

• Megaport Limited (ASX:MP1) had released quarterly updates so KPI’s for FY22 were already known. BAU cash burn for the year increased as management accelerated their investment in sales and marketing. This made some investors nervous given MP1’s declining cash position. However the release of some compelling data points suggest customer Life Time Value is ~6x Customer Acquisition Costs. Sales and marketing investment is value enhancing and 6x justifies continued investment.
• Management noted a strong focus on growing revenue and EBITDA margin in FY23. They are confident in reaching FCF positive with the current funding. We make immaterial forecast changes.
• Our PT increases to (login to view), Hold retained.

Event: FY22 result largely pre-released in July

Revenue was up 40% YoY and significant fixed cost leverage was evident. MP1's gross profit margin (before partner commission) was ~73% for FY22 vs 65% in FY21. Gross profit margin (after partner commission) grew from 53% to 62%.

Operating costs in APAC and Head Office declined from 1H22 to 2H22. Management proved they can rationalise costs if/when required.

June 2022 exit rates showed each region had a 50%+ gross profit margin versus consolidated at 65%. Each region had a 20%+ EBITDA margin (before head office costs). MP1 exited FY22 with a 5% EBITDA margin (after head office costs).

MP1’s NPAT loss of $49m was 35% smaller than FY21 and $10m larger than our forecast, largely due to tax expense. Cash at 30 June was $82.5m, as expected.

Analysis – New data points justify investment in growth while improving FCF

MP1 disclosed LTV / CAC for the first time. FY22 Life Time Value was an impressive ~6.3x Customer Acquisition Cost, and growing QoQ. We consider more than 3x worthwhile and 6x is impressive.

SaaS accounting leader Xero boasts 7x LTV/CAC with ANZ at 15x and ROW at 3x. MP1 management are investing shareholder capital wisely (spending $1 to make $6). We think this justifies investing aggressively in growth, albeit while needing to demonstrate progress towards become FCF positive, within the current funding envelope.

MP1’s Cohort analysis shows customers continuing to spend more each year. On average a customer that joined MP1 in FY14 spent $433 per month (in FY14), while today they are spending 10x or $4.1k. Life Time Value continues to grow.

A customer survival cohort was included. 53% of customers that joined MP1 in FY14 are still customers in FY22 (9 year plus life as a paying customer). Higher consumption rates with age suggest customer life times will be substantially higher. 

In FY22 channel was 34% of revenue booked. In Q4’FY21 MP1 had 28 channel partner. This grew to 78 in Q4’FY22. Of these 78 partners signed up with MP1, 22 are transacting, and the balance are working their way through the path to revenue.

Forecast and valuation update

We make immaterial changes to our underlying EBITDA forecasts while our NPAT decrease materially as we include non-cash tax in our P&L forecasts.

Our DCF based valuation edges marginally higher to (login to view) per share.

Investment view – Hold

We remain long-term bulls on Megaport and its global potential. We expect to see improving sales traction overtime as the indirect/channel partners ramp. However, our experience suggests these things can take longer than anticipated.

Consequently we would like to see several more quarters with incrementally positive sales momentum and declining cash burn to build a base and trend.

Price catalysts

Demonstrating a sustainable acceleration in sales and generating positive FCF.

Management are confident with the current funding but growth is required.

Risks

MP1 is a high-growth business and as such is subject to significant share price volatility concerns. This includes a share price highly sensitive to bond yields and inflation.

All other KPI’s were unchanged, rising interest rates, results in lower valuations. MP1, like most high growth tech stocks has been de-rated and re-rated with interest rate and broader macro volatility.

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